Managers Tout Asset Allocation Funds: Slow Market Good Time to Get Message Out

Eight years ago, cocktail parties were less social occasions and more trial-by-fire for Jim Tracy.

"I literally had people tell me that I was obsolete," said The Hartford's national sales manager for Hartford Mutual Funds.

But when the go-go markets came to a screeching halt in 2000, and each day, more investors watched their portfolios get decimated, suddenly Tracys slow-and-steady investment approach seemed relevant again.

Today, industry executives are using the recent bumpy market stretch to remind financial advisers, and their clients, that asset allocation funds are not only relevant, but critical to their portfolios, especially in a slow or downside market, where these funds are designed to protect investors against dramatic market swings.

"The data suggests that the global economy is slowing down," said Quincy Krosby, chief investment strategist for Simsbury, Conn.-based The Hartford, during a company presentation in New York earlier this month.

"Asset allocation offers diversification, and clients need to be the beneficiaries of that," she said.

The Hartford hopes that its message, along with lessons from the past, convince investors not only to invest now, but to strap in for a smoother, safer ride.

"Asset allocation will be the single biggest determinant in what you earn in your portfolio this year," Whelan said.

Right now, investors seem to be getting the message.

In 2006, mixed equity asset allocation funds, which include target-date and target-risk-type funds, drew $77.8 billion in assets, making them second only to world equity funds, which attracted $157 billion, according to data from Lipper of New York. The third most popular category, U.S. diversified equity funds, attracted $57 billion.

"It goes to show that perhaps people learned a lesson in 1999-2000, that over-allocation in one area is bad," said Lipper Senior Analyst Tom Roseen.

What's more, people-especially as they approach retirement-are willing to pay a premium for the protection such funds-of-funds offer, Roseen said. "People are really looking for that one-stop shop," said Roseen. "They will migrate away from the good-old no-load funds and go to advised funds," he said.

The question is whether investors will be as willing to stay the course with allocation funds when the markets show signs of fast-paced performance. In the same way these funds do not suffer dramatic downside drops, they likewise do not enjoy the blockbuster gains that focused funds, like emerging markets or technology funds, for example, have in the past.

"Asset allocation funds really are evergreen funds," said Duncan W. Richardson, chief equity investment officer for Boston-based Eaton Vance. "They're kind of a good way to combine various parts of the market, get exposure and not have the heartburn," he said.

For example, The Hartford's Balanced Fund used 14 underlying funds, collectively drawing from 800 fixed income securities, and 1,100 equities from 40 different countries. Fund composition is examined monthly and rebalanced accordingly.

Likewise, the Eaton Vance Balanced Fund draws from 16 different classes, and its Tax-Managed Equity Asset Allocation Fund draws from a wide array of the company's other products. Both rebalance regularly.

"You don't need to mess around. You don't need to aggressively chase performance," Richardson said. In up markets, such funds can still serve as strong core investments, Richardson noted.

Regardless of what allocation fund an investor may choose, Roseen stressed the importance of examining the holdings of each to ensure there isn't excessive cross-over between them. Likewise, it is important investors understand that most allocation funds are comprised of proprietary products, not necessarily best-of-class, and that they determine whether the fees fairly reflect that.

In the end, long-term performance and consistency trumps all in any investment, Roseen said.

In 401(k)s and other retirement plans, once investors are in asset allocation funds, chances are that sheer inertia will keep them there, but in non-qualified plans, keeping investors from chasing performance can be tricky.

For fund companies promoting allocation funds in this economic climate, consistency is critical, said Jim Atkinson, principal of Orbis Marketing, a company in Woodland Hills, Calif., that specializes in marketing mutual funds.

"If you want people to stay the course, you have to stay the course," he said. Companies that promote asset allocated funds now, but quickly move to the next hot class later will face outflows.

"There are clearly going to be investors who are frustrated that they are not getting-forget market returns-above market returns," he said. Managers must prepare their investors for undersized gains, but show the compounded value of staying the course, he said.

"Good communication helps, good performance helps, and you have to get [investors'] expectations to match," Atkinson said.